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  • Emerging Markets Debt Daily

    Risk of Premature Rate Cut in Turkey Is Up

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    December 13, 2018

    The market was disappointed by the newfound dovish tilt of the Turkish central bank. By contrast, a stronger dovish policy bias in Brazil was well-received by the market, which continues to price out 2019 rate hikes.

    The Turkish central bank’s dovish hold disappointed markets this morning, forcing the currency to make a 133bps turnaround trip after the announcement. The key policy rate was kept unchanged at 24% (as expected) but an important reference to a “decisively” tight policy stance was dropped from the statement. Apparently, the central bank no longer sees significant risks to price stability, which many commentators believe is premature despite the economy’s sliding into recession (due to sticky inflation expectations and likely bouts of the currency’s weakness). These developments increase the probability of an earlier rate cut in Turkey and are likely to reinforce the market expectation of significant policy easing over the next 12 months.

    Unlike Turkey, the dovish tilt of the Brazilian central bank came as no surprise, given the return of disinflation, soft domestic activity (see today’s below-consensus retail sales for October, for example), and encouraging political/policy signals. The central bank made no change to its policy rate yesterday (6.5%), but new inflation forecasts were lower than expected, signaling that monetary authorities would be comfortable staying on hold for most of 2019—a sentiment that is widely shared by the market.

    Dovish comments from European Central Bank (ECB) President Mario Draghi sent the euro sharply lower in the morning trade. Both inflation and growth projections for 2019 were cut, in line with Draghi’s assessment that risks are moving to the downside. The ECB’s decision to stay on hold at least through the summer of 2019 and continue reinvesting beyond the first rate hike sealed the euro’s fate this morning. The next stop is the Federal Open Market Committee’s meeting on December 19—a more dovish tone (or the perception thereof) may give risky assets another lease on life.



    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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